PL Stock Report: Clean Science and Technology (CLEAN IN) - Q2FY24 Result Update – Demand challenges continue - HOLD

Clean Science and Technology (CLEAN IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd.

Rating: HOLD | CMP: Rs1,374 | TP: Rs1,368

Q2FY24 Result Update – Demand challenges continue

Quick Pointers:

• Topline drag YoY was majorly due to lower volumes.
• Contribution of non-flagship product increased to 25% for the quarter.

Clean Science and Technology (CLEAN) rep orted revenue of Rs1.8 bn (-27% YoY/ -4% QoQ; PLe ~Rs1.9bn) majorly led by lower sales volumes. EBITDA dropped by -23% YoY/ -2% QoQ to Rs 748mn (PLe Rs696 mn/consensus estimate – Rs 765mn) while EBITDA margin came at 41.3% (vs 39.4%/40.5% in Q2FY23 and Q1FY24 respectively. PAT dropped on account of lower operating profit to Rs522mn (-23% YoY/ -11% QoQ; PLe Rs435mn consensus estimate – Rs 613mn). Though management mentioned that overall domestic market was less impacted than exports, there will be subdued performance for H2FY24, in our view.

We remain apprehensive on margins as most raw materials are crude derivatives (that may rise along with crude oil prices). We broadly keep our FY24/FY25E EPS estimates unchanged due to persisting demand concerns across business segments, though recovery is expected post 2 quarters. The company trades at 60x FY24 EPS. Maintain ‘Hold’ rating with TP of Rs1,368 (earlier Rs 1,418) valuing at 48x FY26 EPS.

• Margins improvement on account of better product mix: The company reported lower EBITDA YoY & QoQ in Q2FY24 due to lower topline, however EBITDA margins for the quarter improved YoY & QoQ led by better product mix and prudent cost structure. Other Income & depreciation costs for the quarter increased YoY to Rs 111mn & Rs 60mn respectively.
• Segmental Performance: Revenues from both Performance chemicals & Pharma & Agro Intermediates dropped YoY & QoQ in Q2FY24. Sequentially, FMCG chemicals grew to Rs 272mn majorly on account of volume growth than realizations growth. According to management, pharmaceutical segment got impacted due to lower sales of guaiacol especially in international markets.
• Concall takeaways: (1) Segmental Revenue contribution mix stands at 67%/19%/14% for (Performance products/Pharmaceuticals & FMCG Chemicals respectively) as of Q2FY24 (2) Other expenses higher QoQ due to higher P&F expenses in the quarter (3) Revenue contribution from HALS 770 & 771 seen from international markets as well (4) Revenue Contribution from non-flagship products improved to 25%, despite that EBITDA margins improved (5) Capex incurred for H1FY24 stands at Rs 1.65bn of which Rs 1.5bn is spent in subsidiary (6) Clean Fino Chem, construction work on track, commercial production expected by Q4FY24. (7) YoY basis topline decline of 27% was seen due to 50%:50% by volume/value mix (8) Performance & chemicals segment saw major destocking, while FMCG & intermediates stood less impacted. (9) Capex plan stands at Rs 2bn spread over 3 years, of which Rs 3bn will be for agro-pharma project. (10) Cash equivalents as of Q2FY24: Rs 2.5bn.